Given the forthcoming changes to pensions legislation which are due to be implemented in April, the article below emphasises how it is of paramount importance to obtain advice from an experienced and qualified adviser, to ensure no opportunities are missed. For further information, please visit my website.

Expert advisers are essential for trustees to ensure they deliver pension schemes safely to their desired destination.

A pension fund trustee’s lot is a broad and, at times, demanding one. There’s the business of collecting contributions, or selecting and monitoring investment funds and, in some cases, investing a scheme’s assets. Trustees must ensure members receive annual statements and communicate with them on matters such as automatic enrolment. And, while they administer these and other duties, trustees must act prudently, responsibly, honestly and in the best interest of members.

It is fair to say the tasks of trusteeship are exacting. And, as with any role that has a wide-ranging remit, one of the main daily challenges is to keep abreast of the minutiae. It might be the finer detail of an investing strategy or how assets and liabilities behave that could seem taxing (and, for sure, investing strategies for defined benefit schemes are hard to grasp, even for the most technically-minded).

But, as Sebastian Schulze of investment consultants Redington observes, some complexity is an inescapable feature of setting and monitoring an investment strategy for a pension fund. After all, there is an inherent degree of complexity in the process of managing a pension fund. Interest rates, inflation, longevity, cash contributions, and equity, commodity and corporate bond returns all determine the performance of a fund.

Simplify complexities

This does not mean that solutions need to be so complex that trustees cannot be expected to understand them. Schulze points out that, as in any other walk of life, the important thing is to strike the right balance. “Any complexity introduced should provide value,” he says. “In other words, strategies should be as complex as necessary but as simple as possible.”

But quality guidance is paramount for a board of trustees, and specialist advisers need to be appointed to help select an appropriate investment strategy. Part of the adviser’s role is to explain why the proposed degree of complexity is required and how it will help the pension fund get to where it wants to be. “Once the right level of complexity has been found, it is usually quite easy to explain why it is needed and how it fits together with everything else,” he adds.

A trustee’s knowledge of a pension fund can be usefully compared with that of a pilot’s of an aircraft. “A pilot knows how the different key systems of the aircraft work together – such as the engines, navigation and electronics – to keep the plane in the air and allow its safe passage,” he explains. “Pension trustees are in a very similar position. Trustees cannot be expected to know every single technical detail, for example how each asset in a pension fund portfolio is valued, or how the actuary derives assumptions on life expectancy. But that doesn’t mean that investment solutions need to be so complex that trustees cannot possibly be expected to understand them.”

Flying advice

In the case of defined contribution schemes, trustees need to choose investment funds for the default strategy and further options for members who wish to set their own investment strategy. It’s also important to ensure the risk profile of funds meets the needs of the membership. For both defined contribution and defined benefit schemes, trustees should use advisers who are appropriately qualified to give advice on pension scheme investing.

In order to act prudently, responsibly and honestly, a board of trustees should always take professional advice on any matters which they might not fully understand and on technical issues which may affect the scheme. “Only when these are explained effectively can the trustees make the right decisions for the scheme and ensure members reach their intended destinations safely,” concludes Schulze.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

At this time of year, our focus is clearly on encouraging clients to take action to make full use of the allowances, exemptions and planning measures already in place to ensure financial opportunities are not lost as we move into the new tax year on 5 April. The article below provides interesting reading for both savers and investors.

When the run-up to the end of the tax year coincides with the countdown to a general election, taxation and personal wealth are going to feature high up on the political agenda. Of course, no one knows the outcome of the May election until the ballot has closed and the votes are counted. And any changes to taxation rules will remain in the balance until a new government is formed.

But there are some crucial questions for voters over the coming months. Will there be cuts to higher rate tax relief on pension contributions? Will there be a reduction of the burden of Inheritance Tax? Will Income Tax rates change? Certainly, Britain’s savers and investors can only plan on the basis of what they know – and can only speculate on which election promises become policy.

Yet savers and investors still have to make a series of decisions prior to the tax year-end; a full month before the general election. The best approach to help reduce tax bills and achieve financial goals is to make full use of the allowances, exemptions and planning measures already in place. And that means taking action before 5 April to ensure the opportunities that are available now are not lost.

So, as the tax year-end fast approaches, savers and investors should consider the following.

Take full advantage of your annual ISA allowance

July’s increase in the annual ISA allowance to £15,000 was a welcome, if overdue, development, and reaffirmed the value of ISAs for long-term planning and tax savings. Yet latest HMRC figures from September last year reveal that the average value of a Stocks & Shares ISA portfolio is just £29,520 and that the average contribution in the last tax year was £6,200. Clearly, there is room to maximise the opportunity to generate tax-efficient income and capital gains free of any further tax liability.

However, what hasn’t changed is that your allowance for this tax year will be lost unless you invest by 5 April.

Save tax with pension contributions

The recently announced changes to pensions introduce much greater flexibility and remove many of the reservations some people had about investing through pensions. The annual allowance that can be invested in a pension in this tax year is £40,000. Advantage can also be taken of any unused annual allowances from the 2011/12 tax year onwards.

The continuation of higher rate tax relief on pensions is one of the post-election uncertainties, so those paying tax at higher or additional rates should consider accelerating contributions while the higher tax reliefs remain in place.

Make gifts to reduce your Inheritance Tax liability

Gift exemptions may appear minor in isolation, but their consistent use over the years can produce significant savings and benefits. Each individual has an annual gift exemption of £3,000 and has until 5 April to take advantage of last year’s exemption if it wasn’t used. Between spouses there could be £12,000 available for immediate gifting, which can be divided into any number of individual gifts.

Advantage can also be taken of the normal expenditure from income exemption, which offers a lot of flexibility and is potentially the most generous exemption as it has no defined monetary limit. A number of broad conditions do apply, including that a regular pattern of gifts needs to be established, gifts must come from surplus income and gifts must not affect the donor’s standard of living.

It is also possible to make small gifts of up to £250 to as many people as you wish in any one tax year. The only caveat is that the same individual cannot receive both a small gift and any of the annual £3,000 exemption in the same tax year.

A good way to maximise these allowances might be through Junior ISAs, for which this year’s allowance is £4,000, giving children or grandchildren a head start. Alternatively, investing into a pension for someone else could boost your gift by 20% through the tax relief available on contributions.

Fully utilise your Capital Gains Tax allowance

Individuals can realise up to £11,000 of gains this tax year without having to pay Capital Gains Tax (CGT), which is worth £3,080 to a higher rate taxpayer. And a decision to crystallise gains up to this limit before the end of the tax year could reduce the amount of tax paid in the future. Married couples or civil partners should also not forget to make use of their spouse’s or partner’s CGT allowance.

Transfer assets between spouses

Don’t forget that transfers of assets between spouses are free from tax, which provides the opportunity to ensure that both optimise their available allowances and reliefs. It may be advantageous to transfer assets into joint ownership or to your spouse if they pay a lower rate of tax than you, which could save tax on future income and capital gains.

The level and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances. An investment with St. James’s Place will be directly linked to the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

One of the recurring issues raised by my clients is that of protecting their income in the event of long term illness or disability. We hope you find the article below makes for interesting reading.

New research by the Centre for Economic and Social Inclusion has highlighted worrying figures about the number of UK households that do not have insurance in place to protect income against the risk of serious illness or injury.

Income protection insurance, which pays a percentage of your lost earnings as a tax-free monthly income for a set period of time, or for as long as you cannot work, is the most underused insurance relative to need. It can be an unnerving consideration and evidently many people prefer to believe that it won’t happen to them.

The findings, shared in a new report by the Association of British Insurers*, reveal how many working households do not have an “income safety net” in place to cope with a sudden loss of income when an earner becomes unable to work for more than a few weeks due to a serious illness or injury.

Around 250,000 people, or 1% of the workforce, leave employment each year due to ill health; 60% of these are the main household earner.

More than 60% of working families – 10.8 million households – would see their income fall by more than one third if the main earner had to stop work due to ill health.

Of these, 6.6 million households – about 40% of working families – would see their income fall by more than half.

Not only do these households not have the necessary insurance in place, but the problem is worsened by the fact that they get very little support from the state.

It’s clear that more people need to consider the comparison between the costs of having income protection insurance and not needing it, and needing it but not having it. Good health is our most precious asset; we should use it today while we can to put a complete protection programme in place.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

May we wish everybody a very happy and healthy New Year.

The start of 2015 offers much to be upbeat about – not least the good news of the strength of the US and UK recovery.

Twelfth Night is upon us, the seasonal festivities at an end and 2015 lies ahead; marked, of course, by the usual clamour of New Year predictions of where financial markets and the world economy will go in the coming months and where they will be a year from now. Our view remains that wise investors should not be distracted by market noise or overly concerned by the shifts and the tide of global markets and economics. Long-term investors should, instead, remind themselves of the benefits of a well-diversified portfolio and sound financial planning. That said, the start of 2015 offers much to be upbeat about – not least the good news of the strength of the US and UK recovery – with challenges too that the well prepared could ready themselves for as they journey through 2015.

One unexpected development of 2014 was the fall in the price of oil, which has offered respite for some – particularly Western consumers – but put pressure on others, including energy-related sectors and oil-producing countries. As BlackRock’s chief investment strategist, Ewen Cameron Watt, notes: “I don’t think that you can have a decline in the world’s most importantly-traded commodity without there being some financial disruption arising from it.” Naturally, cheap oil will continue to dominate world markets in 2015, along with the related fallout for Russia’s energy-centred economy as it struggles with Western sanctions. But lower oil prices – Brent crude was down 46% last year – are a boost to the global economy and a fillip for struggling areas such as the eurozone and Japan.

The International Monetary Fund expects overall global growth of 3.8% in 2015, which is a steady if unspectacular advance seven years on from the financial crisis. However, the divergence of the world economies remains a major theme, with the US and UK well ahead of other advanced nations. Overall, the MSCI World index for developed markets gained 2.9% last year (compared with 24.1% in 2013); although difficulties among some of the developing nations meant that the MSCI index of emerging market stocks slid 4.6% over 2014. Emerging market specialist Allan Conway of Schroders notes that, despite domestic demand and reform in some developing nations, the strong dollar remains the primary challenge for emerging markets. China’s slowdown will continue to influence the world’s resource-producing nations, although sub-7% growth remains impressive by most standards.

American star

The performance of emerging and developed markets will also hinge on central bank policy in Washington as it steers the US economy towards full recovery and more normal monetary conditions. The world’s largest economy continues to muscle ahead of the rest of the world, and at its fastest pace since 2003 with an annualised third-quarter growth rate of 5%. The US shale revolution and the strong recovery have driven up the value of the dollar; a situation in which US businesses with their large internal market can prosper, but which places pressure on others, particularly the dollar-oriented emerging markets. A key question for the year ahead is whether this strong momentum displayed by the US economy can haul the rest of the world out of its doldrums.

Last year, global market concerns were focused on how the US Federal Reserve would handle (or mishandle) its retreat from its monthly asset-buying scheme. Given the scale of the Fed’s five years of ultra-loose monetary policy, it is, perhaps, not surprising that fears have lingered over the Fed’s course to normalcy after the end of quantitative easing (QE) last year. But 2015 looks set to be a transition year for US monetary policy, with interest rates expected to rise after the summer from the near-zero level they have been anchored at since December 2008. Fed chair Janet Yellen has pledged that rates, even as they rise, will remain low for a “considerable time”, and can be expected to pilot a slow and steady course to keep markets calm and the recovery on track.

On Wall Street, there is confidence that the recent bull run has further momentum, even as stock-friendly stimulus policies give way to more normal conditions. The S&P 500 has started 2015 with another year of strong growth behind it, 11.4% over the period, although this fell short of the 29.6% in 2013. Last week the US benchmark index hit a record 2,094 points and ended the first day of trading for 2015 at 2,058 points. Although sentiment is not euphoric, there is a strong appetite for US stocks as investors look for returns in a low interest rate environment. Certainly, the concerns of a year ago remain in place as investors look for earnings to catch up with stretched valuations. But US companies remain cash-rich and upbeat; and, despite recent market volatility, investors have remained remarkably sanguine.

Changes to death benefits will allow pensions to be passed from generation to generation.

Next April’s changes to pension legislation further increase the appeal of saving for retirement through pensions, but need to be understood to ensure people take appropriate action.

In the second of two articles on the new rules, Andrew Stokes, Head of Pensions at St. James’s Place, gives his views on the changes to pension death benefits and also explains why those with larger pension funds need to be vigilant.

The changes to pension death benefits had a lot of press coverage. Can you explain what the changes actually mean?

The changes relate to taxation of your pension when you die and how your dependants can inherit the money. The draft legislation that initially came out from the government only looked at one aspect of it – lump sum death benefits.

So, with regard to lump sum death benefits, if you die before age 75 with ‘uncrystallised’ pension funds in defined contribution schemes – i.e. a pension fund that has not been used to provide benefits – there will be no tax to pay. What’s changed is that if you die before age 75 with ‘crystallised’ funds – i.e. a pension fund that is being used to provide benefits through income drawdown – there will similarly be no tax to pay. Furthermore, if you die after 75, the 55% tax rate that applies today drops down to 45% from April 2015. Interestingly, it’s not the date of death, but the date that the claim is settled that determines whether the new tax rate applies.

This is really good news and a dramatic improvement on the current tax situation after age 75.

What’s the tax position if the inherited pension is taken as income rather than a lump sum?

It’s a complex area which underlines the need for advice. Although it is still going through Parliament, the draft legislation proposes that pensions can be ‘inherited’ both by financial dependants and by non-dependants (‘nominees’). If the pension scheme member is aged less than 75 when they die, the dependant or nominee will not pay tax on the income. On the other hand, if the member is 75 or older when they die, the dependant or nominee will pay tax at their marginal rate.

On the death of the dependant or nominee, the pension can then be inherited by a ‘successor’. If the dependant or nominee is under 75 when they die, the successor will pay no tax on the income. However, the successor will pay Income Tax at their marginal rate if the dependant or nominee dies aged 75 or older. If the original member dies before the age of 75, but the dependant or nominee is aged over 75 on their death, the successor will pay Income Tax at their marginal rate.

If someone is a member of a defined benefit (final salary) scheme, should they consider transferring to a defined contribution scheme to improve their death benefits?

If we focus on the point of view that the fundamental purpose of a pension is to provide you with an income for life, why would you come out from a defined benefit scheme? There will always be exceptions, but the primary purpose of a pension is not to provide death benefits. You would be sacrificing income for life and improving benefits for when you’re dead; unfortunately you won’t be there to enjoy it.

Is the lifetime allowance, which sets a limit on the overall size of your pension benefits, becoming more of an issue?

Yes, it’s an issue for a small number of people. As the lifetime allowance has come down from £1.8m, then £1.5m and now to £1.25m as at April 2014, this is likely to become more of a problem in future. You don’t necessarily need a very big fund today to hit those numbers in future, depending on your term to retirement, and depending on the growth rate that you’re going to achieve. For example, someone with 25 years to go would hit the £1.25m lifetime allowance if their fund was £291,000 today and their funds achieved growth of 6%* a year after charges.

At the moment there’s an opportunity to maintain a higher level of lifetime allowance if the value of your pension was over £1.25m on 5 April 2014, through ‘Individual Protection 2014’. If people think it might be a problem for them in the future they should seek advice, but most people don’t have that worry. It would be great if they did.

Do you think more people will now invest for their retirement through pensions?

Pensions are in the news and being talked about, which means people are more engaged with retirement planning. The fact that you get tax relief on the money you put into a pension, and you get 25% of your pension back as tax-free cash, means you’re effectively getting tax relief on tax-free cash. From April you will have the freedom to access as much of your pension as you like from age 55. With all these benefits, why wouldn’t you invest for your retirement through a pension?

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time.

The value of any tax relief depends on individual circumstances.

*This figure is for example purposes only and not guaranteed. Any rate achieved may be higher or lower than this. What you get back depends on how your investment grows.

Investors often fear volatility, but Tye Bousada, co-manager of the St. James’s Place Global Equity fund, explains why there is a lot to love in market uncertainty

Markets have rallied since the brief bout of market volatility back in October; but for many investors, the correction was an uncomfortable episode. EdgePoint partner Tye Bousada, who co-manages the Global Equity fund for St. James’s Place, discusses why these periods of stock market uncertainty are good for long-term investors and provide welcome opportunities.

Q. What are your thoughts about the recent bout of market volatility and what impact has it had on your portfolio?

A. If we stopped a hundred people on the street and asked them for their definition of investment risk, most would probably say stock market volatility. We do not think that definition makes any sense at all. We think the true definition of risk is the possibility of a permanent loss of capital. We like to say that volatility is the friend of the investor who knows the value of a business and is the enemy of the investor who doesn’t. We absolutely love volatility; it can present us with great opportunities. But that’s not to say we’re not sympathetic to the fact that most of your clients hate volatility.

The recent, short-lived bout of market volatility provided the opportunity to increase the weighting of 13 of the 34 companies in the portfolio, establish two new positions and reduce the cash weighting from over 12% to below 8%. We were not nervous; we were extremely active as the share prices pulled back. It comes back to understanding the value of a company in the same fashion that an average consumer would understand the value of a cup of Starbucks coffee. That’s how well we have to know the value of our businesses to be able to capitalise on volatility.

Q. Is there much opportunity for investment growth in current market conditions?

A. We have warned in recent years that it will be increasingly hard to come by growth. Recently, we have been proved right, and we believe that things are going to be slower for longer than people would hope or expect. But we have to find businesses that will be bigger in the future than they are today, irrespective of what happens in the economy. When we find these businesses we have a proprietary insight or an idea that is unique to us.

We continually look for these proprietary insights, although they are not easy to come by. We only own 30-35 businesses in the portfolio, each of which we own for an average of five years. In the past, we could look at 100 businesses and find five good ideas to invest in, but that is not a normal operating environment; recently we have to look at around 300 businesses to find one good idea, which is a more normal environment. We have to work extremely hard to come up with our proprietary insights, but they are there if you look hard enough.

Q. How do you view valuations at the moment?

A. We don’t see the market as either expensive or cheap. We don’t have judgements or opinions on that right now; it’s middling. What we see is an opportunity to be selective in the marketplace and this is very normal in our minds; not compared to the last five or six years, but compared to a much longer period of time.

Q. What would make you sell a business?

A. We sell a business for one of only two reasons. Firstly, if we have made a mistake and we can no longer stand behind our investment thesis and our ownership position in the business; then, we exit it immediately. Secondly, as part of our continual appraisal process, we ask whether the worst idea in the portfolio should be replaced by the best idea that is not in the portfolio. The factor that makes a position the worst idea might be as simple as valuation. We’ve had several positions over the last two years where values appreciated, which vindicated our investment thesis, and we sold and put the proceeds into new ideas.

Q. You said that the cash weighting in your portfolio is around 8%. Is that the normal level?

A. No, our average cash holding is 3-4%, but over the past couple of years a couple of factors have arisen. Firstly, we’ve had strong price rises for the portfolio holdings over the period. We run a concentrated portfolio so performance has been driven by a number of holdings appreciating significantly; when our investment has been realised, we’ve exited those positions and replaced them with new names. However, the exit and replacement don’t always happen at the same time, especially in periods when the market has risen sharply. Secondly, we’ve had a couple of merger and acquisitions and a couple of our holdings have been bought out. In this situation, we may have 3-5% of the portfolio coming back in cash all at once – and it can’t be redeployed immediately. In a normal operating environment, our cash holding will be circa 5% or less.

The opinions expressed are those of Tye Bousada and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.

The approaching changes to pension legislation will create both opportunity and possible confusion.

This year, the Chancellor has proposed some surprising, but very welcome, changes to the rules on how pension benefits can be accessed. The changes being lined up have been largely well-received, but those eligible to take advantage of the new rules may be confused by the number of choices available.

There are two big changes. The first one relates to the way people can take benefits at retirement and means that people will be able to take the whole of their fund as one lump sum if they choose. The other change is to do with the way pension benefits are taxed on death. The two of these together have acted as a game changer in terms of overcoming some major reservations that have previously discouraged people from investing for their retirement through a pension rather than something else.

In the first of two articles, Andrew Stokes, Head of Pensions at St. James’s Place, explains how the changes will affect the way in which pension benefits can be taken.

What do the changes mean for an individual who, let’s say, has a pension fund of £100,000?

The changes enable everybody to take out whatever they like from their pension in one chunk. Whether or not they should is a different matter. At the moment people can do this if their fund is very small – less than £30,000 – or if their fund is very large and they have a guaranteed pension in payment of £12,000 a year. The changes mean that people with a fund size of, say, £100,000 now have the same flexibility. One thing we have to remember is that all of these flexibilities don’t remove the need for people to be responsible. It’s why getting advice is more important than ever.

What are the tax implications if someone took the whole £100,000 in one year?

Let’s assume the individual has no other income to begin with and they’re going to take the £100,000 as a one-off lump sum (known as an ‘uncrystallised funds pension lump sum’). The first £25,000 (i.e. 25% of the fund) is paid as a tax-free cash amount. The remaining £75,000 is taxed as income. Using the rates that apply from April 2015 this means:

Tax rate

First £10,500

0%

Next £31,785

20%

Remaining £32,715

40%

After deducting the tax, the individual receives £80,557.

And that’s for them to live off for the rest of their life?

Precisely. Average life expectancy for a 65-year-old male is 83, and the most common age of death for men is 86 (source: ONS – November 2014), so if they’re taking their benefits in their mid-60s they might have to make that money last 20 years or more.

Do these changes signal the death of annuities?

No, annuities still very much have a role to play. They remain the only way to guarantee a pension income for life. For an awful lot of people that certainty is hugely important – more important perhaps than the flexibility that will be offered under the new rules. I often talk about an annuity essentially being your salary, the income you can rely on, and drawdown being a bonus. So no, I don’t see it as the death of annuities, but I do see them changing.

The government has said it wants everybody who’s a member of a defined contribution pension scheme to get free guidance. What do you think the impact of that is going to be?

Guidance is fine in that it will help people understand what they can do, which is a useful first step. But what most will want to know is what they should do, which is what advice is about. It will mean that those people who want to do things for themselves – who are happy to get information – will be facilitated and will be able to make those decisions. But that’s not the reality for most people. I think most people want advice.

Do you think the need for retirement planning has changed?

No, quite simply because the average size of a pension pot is still very small. The Association of British Insurers reported that 60% of people who retired in 2013 had a pension fund of less than £30,000; 30% had less than £10,000. With numbers as small as that, changes in the way you take your benefits won’t really make a big difference. But what the changes should do is prompt action by people who want to invest for their retirement. That need hasn’t changed.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

The secret of successful saving and investing for children is to start early.

The cost of raising children has often been a pressure point for family finances, and the low wage growth, government austerity and ultra-low interest rates of recent years have made many budgets even tighter. The Centre for Economic and Business Research recently quantified the cost of bringing up a child from birth to the age of 21 as in excess of £227,000 compared with more than £140,000 when the research started in 2003. Clearly, bringing up a family has become more of an expense over the last decade, as has the cost of living for anyone making their early steps in adult life.

Faced with these rising expenses and dwindling returns from savings, many parents may well baulk at or be unable to fund the commitment of building a nest egg for their offspring. Some may wish to encourage their children to learn good savings habits for adult life. (Commendably, the Church of England last week unveiled an innovative scheme to educate children to manage money through the creation of credit union-run savings clubs at primary schools.) But, many want to help their children directly by saving on their behalf…

Five principles can help keep you on track to long-term financial security.

The path to long-term financial security is strewn with uncertainty and complexity, but five principles can help keep you on track.

There was a time when saving and investing for the future was considered a relatively uncomplicated affair that felt many steps removed from the intricacies of finance and global economics. Progress in recent decades – from the sophistication of everyday technology to the ready availability of round-the-clock services – has simplified many parts of our lives. But it has brought more complexity, particularly in matters of personal finance.

Research consistently shows that many people find the decisions they need to make on saving and investing difficult, despite the profusion of information available. The paradox is that this confusion has deepened as financial services have modernised. The real danger is that people disengage from the process of how to create the wealth they need for their future.

While many things have changed, there are a number of constant principles on which investors should base their strategy to help fulfil their financial aspirations. The key rules that investors should follow in their quest for wealth are simply: invest for the longer term; make sure you have sufficient money on deposit for your short-term needs; guard against inflation; diversify your investments; and find the very best managers.

Old habits

Britain’s savers are enduring the lowest returns on cash for centuries; but many remain wary of stock markets, despite their recent recovery. Instead, many continue to accumulate cash; perhaps, overwhelmed by choice, it is easier to cling to old habits. But disappointing rates are expected to endure and the eventual rise will be slow and low. In such an interest rate environment, those who wish to achieve meaningful returns will need to reassess their savings on deposit.

However, cash still plays a vital role in an investment strategy, and enough should be kept on deposit. Chris Ralph, Chief Investment Officer of St. James’s Place, says: “If you maintain adequate liquidity, you should avoid the need to sell long-term investments at a bad time,” says Ralph. “As a guide, you should have enough to be able to sleep at night, and cover both expected needs and unforeseen emergencies.”

Loyalty’s return

Investors who hold enough cash can ignore passing market sentiment; while those with short-term horizons are more likely to be disappointed. Over the long term, investment in real assets, such as equities, provides the best chance of inflation-beating returns. When the ‘dot-com bubble’ burst in March 2000, global equities tumbled for three years; share prices rose until the 2008 financial crisis took markets to a low in March 2009. Since then, shares have climbed again, with ups and downs along the way, to near-record levels.

Ralph comments: “Investors cannot consistently and successfully time the markets, but those who hold assets for extended periods can reap the cumulative benefit of time’s smoothing effect on market fluctuations and unforeseen events.” No one knows what will happen to share prices in the short term, but those who invest over a longer period – say five years or more – are likely to be better off than they are today.

Steady attrition

One persistent obstacle that an individual will need to overcome on the road to wealth creation is inflation. At a level stubbornly below the Bank of England’s 2% target, the inflation threat may feel distant. But even modest levels of inflation can erode cash in a low interest rate environment. And all of us at some point in our lives are likely to live through at least one period of significant inflation.

The effects of inflation can be as severe as a sharp fall in markets. However, whereas market dips are usually followed by recoveries, inflation permanently reduces the value of your savings. While you should hold money on deposit for short-term needs, there is significant risk in trying to play safe by putting all your money into cash-like investments. When investing for the long term, you should keep an eye on inflation.

Variety’s strength

The old adage that investors should not put all their eggs in one basket still rings true. As well as the appropriate level of cash, it is important to diversify as widely as possible across different investments that can protect against inflation. “The trick is to ensure that the selection of assets won’t react in the same way to market events or economic changes,” says Ralph. “Just as investments will not rise at the same pace or time, you should ensure that they do not fall at the same time either.”

Shares, bonds and commercial property are examples of assets that can provide growth. Investing in funds rather than individual investments also ensures that money is more widely spread. And by investing in a selection of funds that diversify across different shares, sectors and regions, as well as asset classes, investors will be better placed to withstand shifts in economic and financial conditions and achieve above-inflation returns over the long term.

Pathfinders

Different managers have different styles and assets; but many invest in the same way, so variety is no guarantee of diversity. There are a large number of fund managers to select from; some are excellent, some are very good, and some are not. “It is critical to have an investment approach that gives the best chance for your money to be with good managers,” advises Ralph. “Understanding how your adviser researches, selects and monitors the fund managers should be high on your list of priorities.”

There are no paths for investors that are risk-free and there probably never were. Making an informed and confident choice is not an easy task. The key to building long-term wealth is a realistic assessment of needs and goals that reflects a level of risk that feels comfortable. Individuals are often reticent about reviewing their approach to wealth creation; but advice is the key for a planned, long-term investment strategy and for peace of mind.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. Equities do not provide the security of capital associated with a deposit account with a bank or building society.

Sadly, over the last month, I have had to deal with the loss of two of my clients. My Blog this week focuses on the importance of ensuring that your protection needs are covered for and also that of your family.

Life and health insurance protection is the underpin of most good financial planning. These types of insurance can ensure that, if the worst should happen, the right amount of money will reach the right hands at the right time.

Life insurance puts money in the hands of those who need it when a person dies. There are many reasons why this money might be needed, including paying off a mortgage (or other loan) if a borrower dies, protecting a family against the early death of a spouse, partner or parent (particularly important for people with financial responsibility for children), paying inheritance tax (IHT) or protecting a business against the financial consequences of the loss of its owner or a key employee.

The life assurance needed to cover a loan is relatively simple to assess. You need enough insurance for the amount of the loan and the cover should last for the time that the loan is outstanding. If you pay off some of the loan, you should be able to reduce the amount of cover earmarked for this purpose. But most people also need insurance cover to replace their income if they were to die. The same principles apply but the calculations are a little more complicated. For example, you decide you need life assurance cover to provide the school fees for a child who is now five and will probably be in school until she is 18. You should therefore first quantify the total amount of school fees that you would have to pay over the period and take out cover of this amount for the next 13 years.

The approach to insuring other needs is roughly the same. For example, you could calculate how much your family would need to cover the general household and other expenses and how long they would need the funds.

You can arrange for life cover to pay out a series of annual amounts over a set period, which is a simple approach to replacing an annual income. But most life cover pays out a lump sum. If you want a lump sum to provide £1,000 a year for 10 years, you would need life cover of about £10,000; if the income were needed for 20 years, you may need an amount slightly less than £20,000 as the invested sum may produce some growth or income.

It’s sometimes hard to work out how much life cover you would require overall for your family, because of the difficulties of assessing your family’s needs after one or both parents have died. Current levels of expenditure provide a good starting point for making these estimates, and then you would have to consider the other costs that might be involved, like childcare. It can be especially difficult to assess the potential financial impact of the death of a parent who spends most of their time looking after children and the household. A good starting point is to estimate the costs of buying in these services.

The best way to ensure that the proceeds of a life policy are paid to the people you intend to benefit is usually to arrange for the policy to be in a trust.* The most appropriate type of trust is generally one that gives the trustees discretion or flexibility about how they distribute the benefits, but it’s a good idea to get advice about this. If you die, the policy proceeds will be paid to the trustees and then the beneficiaries – not into your estate. This arrangement should save inheritance tax and speed up the payment to the beneficiaries.

By contrast, the purpose of health insurance is to provide some money if you fall seriously ill or have an accident, potentially affecting you for many years. In this case, you would probably stop earning although your financial needs might well be greater than ever. The state benefits you would receive would be relatively low and unlikely to provide sufficient income to meet your needs, especially if you have substantial rent or mortgage payments to make. You might also need capital, for example to make adaptations to your home or to pay off loans or other liabilities.

Virtually everyone who is working needs some kind of health insurance to provide financial protection if their earnings are affected by serious illness or disability. Even if you have no financial dependants, there’s a very strong chance that you will need health insurance.

Income protection – sometimes called permanent health insurance – pays a weekly or monthly income if you cannot work because of illness or disability. You may think you don’t need to worry about this kind of cover, but the fact is that, in the UK, there are over 11 million people with a limiting long term illness, impairment or disability and 1 in 7 working age adults suffer from a disability (Taxbriefs, May 2014)..

Some employers provide income protection insurance, but a very large number do not. It’s worth specifically checking the position with your employer. Income protection can appear relatively expensive, but can be very valuable if you fall seriously ill.

It is normally advisable for income protection insurance to be inflation-protected in two main ways. You should be able to increase the level of cover from time to time regardless of your state of health, or the cover should increase automatically in line with inflation or some fixed percentage. But it’s also important to make sure that the benefit payments themselves keep pace with inflation otherwise, if the benefit payments never increased after you fell ill and could not work, their real value would be gradually eroded over the years.

Critical illness insurance pays a lump sum if you are diagnosed as suffering from a specified illness. The advantage of critical illness insurance is the benefit is paid shortly after diagnosis of the illness, without any significant delay – unlike the waiting period of income protection. It’s also in the form of a lump sum that can allow you to make rapid adjustments to your lifestyle and pay off loans.

People often take out critical illness insurance to cover a mortgage or other loan. Because you are more likely to have a critical illness than die, it’s more expensive than life insurance, but this reflects the likelihood of needing to claim on the policy.

The final area to consider is medical insurance. These are policies that help you to afford the cost of private medical treatment.

Insurers are constantly looking at new ways to meet people’s needs, such as through life insurance that includes critical illness and/or income protection insurance, which may be cheaper. It’s important to look at your options and seek the assistance of a trusted adviser.

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The Partner represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group's wealth management products and services, more details of which are set out on the Group's website www.sjp.co.uk/products. The 'St. James's Place Partnership' and the titles 'Partner' and 'Partner Practice' are marketing terms used to describe
St. James's Place representatives.
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